A:

As of Sept 28, 2001, the NASD (now, FINRA) and NYSE amended their definitions of day traders. A new term that they use is "pattern day trader". An investor can be classified as a pattern day trader by having one of the two following characteristics:

  1. He or she trades four or more times during a five-day span, or
  2. The firm where the investor is making transactions, or opening up a new account, reasonably considers him or her a day trader

Once an investor is considered a day trader, the brokerage must classify him or her as such, and the investor is then subject to increased equity requirements. Mainly, the brokerage must require a minimum equity of $25,000 at the beginning of the customer's trading day. This minimum equity requirement has been introduced by the Securities & Exchange Commission and the NYSE. Ensuring that any substantial losses can be offset by the day trader's own equity, the requirement addresses the inherent risk imposed on brokerages by leveraged day trading activities.

A more restrictive margin rule has also been implemented. Day traders are permitted to purchase only four times their maintenance margin levels. If this level is exceeded, the firm must issue a margin call to the day trader who subsequently has five business days to deposit the funds before the account is halted from additional trading.

For further information, see our articles Defining Active Trading and Day Trading: An Introduction.

RELATED FAQS
  1. Is it better practice to use a stop order or a limit order?

    Both stop orders and limit orders have their advantages and disadvantages; traders need to decide between the two based on ... Read Full Answer >>
  2. How do day traders capture profits from the difference between bid and ask prices?

    Day traders capture profits from the difference between bid and ask prices by scalping stock. Sensing that a stock is going ... Read Full Answer >>
  3. How is buying on margin regulated by the Securities and Exchange Commission (SEC)?

    The Federal Reserve Board and the Financial Industry Regulatory Authority (FINRA) regulate buying on margin to a greater ... Read Full Answer >>
  4. Why is the Vortex Indicator (VI) important for traders and analysts?

    Doug Siepman and Etienne Botes developed the vortex indicator to anticipate reversals in price trends. They believed that ... Read Full Answer >>
  5. What is a common strategy traders implement when using the Trade Volume Index (TVI)?

    The trade volume index (TVI) indicates whether an asset is being accumulated or sold. It is calculated using intraday tick ... Read Full Answer >>
  6. What is a common strategy traders implement when using the Volume Weighted Average ...

    Using the volume-weighted average price (VWAP) when trading in short-term time frames is highly effective and simple. One ... Read Full Answer >>
Related Articles
  1. Investing

    Redefining the Stop-Loss

    Using Stop-losses for trading doesn’t mean ‘losing money’, but instead think about the money you'll start saving once you learn how they work.
  2. Trading Strategies

    Stock Trading for Free: Now a Reality

    Believe it or not, you can now trade stocks and ETFs for free. Here's a look at providers offering commission-free trading.
  3. Investing News

    Mexican Energy, Telecom Reforms Please Foreign Investors

    Two years into his first term, Mexican President Enrique Peña Nieto is following through on radical campaign promises he made to Mexican citizens for sweeping multi-industry reform.
  4. Trading Strategies

    The Top Spread-Betting Strategies

    What are the most commonly followed spread-betting strategies (in countries where it's legal)?
  5. Investing

    Top Cities Where Airbnb Is Legal Or Illegal

    Thinking of subletting your apartment on Airbnb? Make sure that you meet your city's regulations first.
  6. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  7. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  8. Investing Basics

    5 Things to "Deliberately" Do to Improve Your Trading

    Most traders are putting in trading hours, but not improving. Here are deliberate steps that can take your trading to the next level.
  9. Term

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  10. Credit & Loans

    Co-signing a Loan? Make Sure You Know The Risks

    Contractually, co-signers are just as responsible for the loan as the person actually borrowing the money. Be careful not to put yourself at risk.
RELATED TERMS
  1. Emergency Banking Act Of 1933

    A bill passed during the administration of former U.S. President ...
  2. Slander

    Slander is the act of harming one person’s reputation by telling ...
  3. Libel

    Libel is publishing a statement about someone in written form ...
  4. Defamation

    Defamation is any statement (written or spoken) that damages ...
  5. Fair Housing Act

    This law (Title VIII of the Civil Rights Act of 1968) forbids ...
  6. PCI Compliance

    Technical and operational standards that businesses are required ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!